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Your 401(k) can be one of the most powerful tools at your disposal when it comes to building your retirement nest egg. Indeed, it is quite possible to reach a $1 million account balance or more just based on the money inside your 401(k) or similar employer sponsored plan.
That said, while you can reach a $1 million nest egg using only your 401(k), you are a lot more likely to do so if you have savings and investments outside of your 401(k) as well. This is because life happens and people have priorities other than retirement. If your 401(k) balance is your only source of cash for those other needs, it gets very tempting to tap it early, thus leaving you short on your $1 million goal.
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How straightforward can the path be?
The table below shows how many years it will take to reach a $1 million nest egg inside your 401(k) based on the amount you can invest each month and the rate of return you earn along the way. The $1,625 monthly investment level at the top of the chart works out to $19,500 per year, which is the 2021 contribution limit for most employees under age 50.
Monthly Investment
10% Annual Returns
8% Annual Returns
6% Annual Returns
4% Annual Returns
$1,625
18.2
20.4
23.5
27.9
$1,000
22.4
25.5
29.9
36.7
$500
28.8
33.4
40.1
51.0
$300
33.7
39.4
48.0
62.5
$150
40.5
47.9
59.1
78.8
Data source: author.
As you can see, the path to $1 million inside a 401(k) can be quite straightforward. In fact, check out that bottom row in the table — $150 a month. That works out to about $5 a day. Start out early enough in your career, and a million dollar retirement could potentially be yours on even that small a savings amount.
If it’s that easy, why doesn’t everyone retire a millionaire?
Of course, that raises a key question — if the path to $1 million is really that straightforward, why doesn’t everyone retire a millionaire? A big part of the reason is the fact that as the old saying goes, “the best laid plans of mice and men often go awry.” Life happens, things go wrong, and unexpected expenses crop up. You have to cover those costs and potentially deal with the surprise lack of income from getting laid off or being injured and unable to work.
If your only source of savings and investment is your 401(k), then that’s where the money is going to come from to cover those surprise costs. Unfortunately, that often comes with high taxes and a 10% penalty on top of those taxes, which strips your nest egg of a lot of its value. Also, once you’ve taken the money out of your account and spent it, that money can no longer grow and compound for you, thus taking you even farther away from your $1 million goal.
In addition to the unexpected, we all have financial priorities in life aside from retirement. Yours could include a new car, a new home, children’s educations, a major bucket list vacation, or a whole host of other things that require more money than you take home in any given paycheck. If all your money is going toward your 401(k), then you either won’t have the money to cover those other priorities or you’ll be sorely tempted to raid your 401(k) to pay for them.
Life is too short, too uncertain, and has too many competing priorities for your 401(k) to be your only source of savings and investment. Plan for that uncertainty and those other priorities outside of your 401(k), and you put yourself in a better spot to let your 401(k) grow throughout your career to meet that $1 million mark.
Balance across your priorities, and you could wind up a millionaire
Your 401(k) can let you retire a millionaire, but it has a better chance of getting you there when it works as part of an overall balanced financial plan. Live your life, expect the unexpected, and save on a path that gives you a decent shot of winding up a millionaire by the time you retire. That balanced plan gives you the best chance of reaching millionaire status by retirement while still enjoying life along the way.
Still, the longer you have until you retire, the easier and cheaper it is to reach your goal. So get started now, and give your 401(k) and its partners the longest runway you can to help you retire a millionaire.
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Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
